All reputable equity release lenders will insist that you obtain independent legal advice as part of the transaction. Indeed, you will not receive any funds until advice has been signed-off by your solicitor. This is of course a good thing: it protects you from potentially entering into an agreement that you don’t understand. All SEQUAL lenders abide by a strict code of conduct that demands this as a requirement for membership.

However, many people do not realise that this requirement also protects the lender. Independent legal advice is the best way they have of guarding against any possible mis-selling by dodgy mortgage brokers. It also ensures the lender’s legal position is sound in the case of any possible future dispute with the borrower or their estate.

If your lender is not asking for you to obtain legal advice, you should really question their credibility. Check your lender here. 

For many retirees on limited funds, this becomes the big dilemma. In most states, the process of selling your home and downsizing to buy a smaller dwelling will cost $40-50,000 by the time you factor in stamp duty, agents fees and legal costs etc.

In addition, many people are forced to re-locate to a new area, away from their family, doctor, friends and community. This is often the most distressing aspect of downsizing.

However, accessing some of the value in the home via a reputable equity release provider can give you more cash and allow you to stay in the home you love. You need to do the sums, but in many cases it will be more cost effective to borrow via a reverse mortgage or similar, than to downsize. A good specialist finance broker will help you with this exercise.

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If you have an existing loan through one of the major banks, chances are you’re being charged a monthly fee of $10 or $12. This is an absolute scandal!  

These fees will quickly attract interest and you’ll eventually be charged compounding interest on bank fees. Outrageous.  If you go with a lender who charges monthly fees , over the life of the loan you’re likely to pay many thousands of dollars in unnecessary interest.

Are you paying too much? Check your loan here. 

This is a special feature that many reverse mortgage lenders offer where you can effectively quarantine a portion of your equity for children or beneficiaries. By borrowing less than you are eligible for, you can ensure that your heirs will receive a pre-determined amount of the equity regardless of what happens to the loan balance or property prices in future.

 Eg; Let’s say you are 70 years old and have a house worth $300,000. You would be eligible for a maximum of $75,000.  If you chose a Protected Equity Option of 20%, you would only be able to borrow a maximum of $60,000, however you would ensure that your beneficiaries received 20% of the future sale price of your home, regardless of the loan balance at that time.  

Although this feature is currently not that popular amongst borrowers, it’s a handy option. Borrowers in remote and regional areas, where house prices may not grow as strongly as those in the city, may be wise to consider this option when establishing a reverse mortgage.    

Some lenders run special promotions from time to time, waiving their set up costs in whole or in part. It’s a good idea to ask your broker to check for these specials so that you can minimise your upfront costs.

If you are unsure if you qualify, or you would like to find out which lenders are currently waiving fees, go here.  

The recently released 2007 SEQUAL Report contains some interesting data on exactly how people are using their reverse mortgages:

1. 90% of new loans were taken as lump sums, and only 10% as an income stream.

This figure is somewhat misleading as the ‘lump sum’ data also includes all loans taken wholly or partly as a ‘cash reserve’ or ‘line of credit’. 

2. The proportion of younger borrowers is rising

Although the average age for people taking out new loans is 72, the 40% of new borrowers were under 70 years of age (compared with 29% for existing loans). This indicates that reverse mortgages are growing in popularity the fastest amongst those aged 55-70.

3. Variable interest is the most popular choice    

Although fixed rates have risen in popularity to 34% of all new loans in 2007, the vast majority of reverse mortgages were established with a variable rate in place (66%).

4. Mortgage brokers are now the most common way for seniors to establish their reverse mortgage

45% of all new loans were established via mortgage broker in 2007, compared to only 34% directly with a financial institution. This seems to confirm that seniors are actively seeking the wider product choice that brokers can provide in an effort to get a better deal and save on interest.

5.  Home improvements and general living the most common purposes

 The most common use of funds provided by reverse mortgages in 2007 were:

• Home improvements - 16%
• Regular income -  12%
• Debt consolidation - 11%
• Travel - 8%
• New Car - 5%

The figure for ‘other’ was listed at 41%, but anecdotally this can be mostly attributed to general consumption and living expenses.   

According to the annual industry report released last week, the demand for reverse mortgages in Australia continues to grow strongly. The industry body, SEQUAL,  has just released the market figures for the 2007 year which show that outstanding reverse mortgage loans now exceed $2 billon. 

A summary of the key points found in the report:

• 33,700 loans now outstanding amongst senior conumers
• Market growth for existing loans was 34% in the past 12 months
• The average loan size is now $60,000

The report also found that whilst the outlook remains strong, growth for new loans slowed in the second half of 2007. This was due to a combination of factors including the global credit crunch and political uncertainty surrounding the recent federal election. 

Many people don’t realise that these days it’s usually possible to pay an accommodation bond for entry into aged care without selling the family home. A few select lenders such as Bluestone & ABN Amro allow the  person going into care to borrow against their property via a reverse mortgage to pay for the accommodation bond.

The house can then be rented out,  if structured correctly, without any impact on the government pension. For more information on reverse mortgages for accommodation bonds and aged care go here. 

One of the most popular ways to borrow money via a reverse mortgages these days is a ‘line of credit’. This is where you establish a pre-approved limit, but you only draw on the funds as you need them.

This is great for ‘rainy days’ and emergencies, and is usually a much more cost effective way to access your equity.

As an example, if you were 65 years of age and owned a house worth $400,000, you could access up to $80,000 as a reverse mortgage. With some leenders, you could choose to establish all of this as a line of credit. Although the $80,000 is always available you are not contractually obliged to use any of it, and you will ONLY be charged interest on what you do use.  For more info, check out this Equity Release Guide.

As of April 1st, all mortgage brokers who offer reverse mortgages to senior borrowers must be accredited with the industry body, SEQUAL or they will face expulsion from the industry. 

In a positive development for consumers and the industry, the Mortgage and Finance Association of Australia (MFAA) has ruled that mortgage brokers who have not completed the SEQUAL training and accreditation course can no longer provide a reverse mortgage to a borrower until they have done so.

Although the vast bulk of mortgage brokers are professional and do a good job, there are still some ‘cowboys’ who just chase a fast buck with scant regard to the actual needs of customers. This new ruling will make it much more difficult for these dodgy brokers to operate in the senior’s market.

If you’re seeking a reverse mortgage or equity release plan, and you’re using a broker to assist with the transaction, you should ask your broker the following questions upfront:

• Are they accredited with SEQUAL? If so, ask for evidence.
• How many lenders do they have access to? They should have at least four.
• What are their charges?

A good broker will generally not charge you directly, as they receive a commission from the lender. For a better idea of what a reverse mortgage broker should offer, check out the Voluntary Code of Conduct recommended by Seniors First here.